ADDIS ABABA, Ethiopia (AFP)–Ethiopia’s currency, the birr, fell to its lowest ever rate Monday against the dollar, losing nearly 10% to exchange at 12.445.
The National Bank of Ethiopia, the Horn of Africa nation’s central finance institution, devalued the birr in the face of dwindling forex reserves.
In January a dollar was worth 10.57 birrs.
The foreign exchange shortage is mainly due to a reduction in coffee exports, from which more than 60% of the country’s total foreign exchange revenue is generated.
Ethiopia’s hard currency reserve stood at $800 million last month, against a target of more than $1 billion.
In 2007-2008 Ethiopia exported 171,000 metric tons of Arabica coffee – almost 15% of world production – and earned more than $500 million, according to official figures.
Authorities have issued a grim forecast this year however, with figures expected to be as low as slightly more than $300 million due to a slump in demand as a result of the global economic slowdown.
For your info: Effects of Devaluation
A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth.
Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may dampen investor confidence in the country’s economy and hurt the country’s ability to secure foreign investment.
Another possible consequence is a round of successive devaluations. For instance, trading partners may become concerned that a devaluation might negatively affect their own export industries. Neighboring countries might devalue their own currencies to offset the effects of their trading partner’s devaluation. Such “beggar thy neighbor” policies tend to exacerbate economic difficulties by creating instability in broader financial markets.
